Fitch Affirms Leucadia's Long-Term IDR at 'BBB-'; Outlook Stable

March 06, 2014 05:01 PM Eastern Standard Time

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed Leucadia National Corp.'s (Leucadia)
long-term Issuer Default Rating (IDR) at 'BBB-'. The Rating Outlook
remains Stable. See the full list of ratings at the end of this press
release.

The ratings of Leucadia and its main operating subsidiary, Jefferies
Group LLC (Jefferies), continue to be equalized, as Jefferies is
considered a core subsidiary under Fitch's criteria 'Rating FI
Subsidiaries and Holding Companies'. This is based on Jefferies'
significance relative to Leucadia's equity and the likely role it will
play in the combined company's future strategic direction. Fitch has
also affirmed Jefferies' ratings with a Stable Outlook today.

KEY RATING DRIVERS

The affirmation of Leucadia's rating reflects its strong liquidity
position, modest leverage and measured deployment of capital generated
from recent asset sales. The company continues to adhere to the
operating parameters specified at the time of the merger, with the
exception of a temporary increase in stressed leverage, as discussed
below. Fitch continues to assess Leucadia's strategic direction and
investment approach under the new management team, which are both at
early stages of their implementation.

Leucadia has sold a number of its investments over the past two years,
bolstering liquidity, and will eventually reinvest a portion of this
capital. The dispositions have generally resulted in gains, particularly
for larger assets such as Fortescue Metals Group. It is not yet clear
how Leucadia plans to deploy the capital freed up from recent asset
sales and recent debt issuance. Asset management and natural resource
projects have been highlighted as potential areas of focus. Compared to
historical activity, Fitch expects future investments to be
characterized by smaller size, greater liquidity and improved diversity.
Ownership of Jefferies may offer additional opportunities for Leucadia
to act in a merchant banking role.

The company continues to maintain a conservative capital structure.
Parent-only debt-to-stressed equity (excluding the two largest
investments and the deferred tax asset) increased to 0.67x at Dec. 31,
2013 from 0.27x at Sept. 30, 2013. The increase was driven by the
issuance of $1 billion in long-term senior unsecured debt in October
2013, including a $750 million 10-year tranche and a $250 million
30-year tranche. Fitch views the increase in leverage as temporary and
expects the ratio to decline below the 0.50x operating parameter within
the next 18-24 months, as the company repays maturing debt and
accumulates retained earnings. Furthermore, Leucadia is expected to
remain in compliance with all of its other operating parameters.

As a result of the recent sale activity, holding company liquidity is at
an all-time high. As of Dec. 31, 2013, the company had $3.1 billion in
cash and available-for-sale investments, a substantial majority of which
was comprised of cash and U.S. government and agency securities. As
mentioned above, Fitch expects a portion of this liquidity to be
deployed into new investments over the intermediate term.

Succession issues that historically constrained Leucadia's ratings have
been alleviated with Richard Handler and Brian Friedman taking key
leadership positions. Key man risk continues to be a concern for both
Leucadia and Jefferies, although Fitch recognizes that Jefferies has
broadened and deepened its bench over the past several years.

RATING SENSITIVITIES

Potential positive rating drivers for Leucadia would include greater
clarity regarding the firm's strategic objectives and eventual execution
of those objectives, particularly with respect to the deployment of its
excess capital. Furthermore, a demonstrated commitment to a conservative
liquidity profile, limited investment concentrations and reduced
leverage at the parent company would also be considered positive
drivers. For Jefferies, continued improvement in profitability and
compensation cost containment would contribute to positive rating
momentum over time. Fitch continues to monitor the interaction between
Leucadia and Jefferies, which will play an important role in the
longer-term value and risk profile of the combined franchise.

Jefferies' and Leucadia's ratings could be negatively impacted by a
material increase in leverage or a less conservative liquidity and/or
funding profile at either entity. Jefferies' leverage remains at
historically low levels and Fitch expects that over time, if markets
remain stable, it may increase modestly. Ratings would also be
negatively impacted if Fitch perceives the risks taken in Leucadia's
investment portfolio as increasing materially from current levels. Fitch
will continue to assess the ability of Jefferies' management team to run
both companies effectively. Furthermore, the unanticipated departure of
key executives at either Jefferies or Leucadia could result in negative
actions.

Leucadia operates its business similarly to a closed-end alternative
fund and serves as the holding company for Jefferies. As of Dec. 31,
2013, it had roughly $47.9 billion in consolidated assets and $10.1
billion in book equity. In addition to Jefferies, Leucadia's portfolio
includes significant equity stakes in other private and public companies
as well as Treasuries and other fixed income securities.

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